Renters Regain Control and a New Rent Price Forecast

Dave:
As investors, rent prices and rent growth are some of the first things that you look at when you’re analyzing a deal, considering a market, or just trying to figure out what kind of investments you’re going to make. And for a long time, rent growth was relatively stable and predictable, but not for the last couple of years. These days, we have to pay much closer attention to rent trends with all the supply that is going on, all the changes to demand in the marketplace. If we want our investments to perform to their peak potential, we need to understand these things. And we can’t just look at one top line national number. We have to look at the regional and market trends and understand really in our subsection, our niche of the real estate investing world, what is happening because rent plays such a huge role in the performance of our investors. So today, that’s what we’re gonna be digging into.
Hey, BiggerPockets listeners, it’s Dave here for our weekly Bigger news episodes, and it’s been sort of a while since we talked about what is going on with rent trends. So I wanted to bring on an expert to help us understand what changes have been going on, how things are moving as we get towards the end of 2024 here. And so we’re bringing on Igor Popov, he’s the Chief economist with apartment list. They produce some really interesting insightful reports. So I’m eager to bring on Igor to talk about first and foremost, the, I’ll keep it short, but recent history of rents and what’s been going on over the last couple of years. How the recent boom in multifamily supply has impacted rents and what’s happening today in 2024 that will turn our attention to the future. And talk about how as supply peaks and new construction stops coming online in the next couple of years, like what is gonna happen to rents then?
And because we’re recording here on September 18th, and just like an hour ago we heard that the Fed cut interest rates by 50 basis points. We will get into that a little bit, but to be honest, still processing all of that information. And I know for some people talking about rent trends and growth can feel like sort of this nerdy data-driven topic, but it doesn’t have to be. And Igor really does a great job of translating numbers and trends. It’s very clear takeaways that can help you in your investing career and your investing decisions. And I think you’re gonna learn a ton from our conversation. So let’s get into it. Igor, welcome to the BiggerPockets podcast. Thanks for joining us.

Igor:
Hi, Dave. I’m really happy to be here. Thank you for having me on.

Dave:
I’m excited to have you. We’re gonna talk and dig into rent growth, rent trends. Mm-Hmm.

Igor:
<affirmative>,

Dave:
All of that good stuff that our audience, I’m sure is very eager to hear from you about. But first, tell us a little bit about your background and your work at Apartment List.

Igor:
Yeah, absolutely. I’m the Chief economist and head of product analytics at Apartment List, I should say. Apartment list is an online, uh, rental marketplace. So if you’re a a property manager, landlord, you can list a, a, a rental. If you’re a renter, you can have a curated and a search experience to try to find the place that’s right for you. And I lead our internal analytics, but also our, our research team, uh, that kind of has an outward facing view and tries to understand what’s happening in the market and also try to make sure that the data that we’re seeing while we operate our platform kind of gets into the hands of all of the, the people that need it most to make decisions. Um, and so I have a really fun job. I get to talk to smart people all day and play around with a lot of fascinating housing market data. And, you know, when I, when I started in this role, I had no idea just how bonkers the housing market in the US would <laugh> would, would, would become, uh, as we got into 2020 and and the subsequent years, I think the demand for real time, uh, rental data just shot through the roof. And so yeah, we found ourselves in a very fortunate position to be able to kinda provide that to some of the outside world.

Dave:
Yeah. So I’m eager to hear what is happening. But before we get into that, could you help us just set the stage and provide some context for what is, quote unquote normal rent growth <laugh>? Like if you Right, were to describe a bland year of rent growth and rent prices. Mm-Hmm. <affirmative>, what would you expect?

Igor:
You know, when we were living our lives in 20 17, 20 18, 20 19, we didn’t think of those as particularly normal years that we would refer to as, as normal for, uh, for some time afterwards. But from a rental market perspective, um, you know, rents, rent growth hovered between three to 4% annually, kind of outpacing broader inflation by just a tad. And there was some really interesting regional variation, but it wasn’t dramatic. You know, kind of hot markets grew five to 7% a year. Cool. Markets might grow, you know, 2% a year, maybe 1% a year. Rent growth was really sluggish. The only places with real double digit rent growth would be small kind of fracking or oil towns. When something dramatic happened in the energy sector, they would have a big swing. Uh, come 2020 when the pandemic hit, everything really changed overnight. And all of a sudden we found that these real time shocks in demand could have dramatic swings on the housing market.
2020, we saw, you know, rents really nose dive in some of the, the, the cities where, you know, location was at the highest premium, right? New York, you’re there because you wanna be close to everything in New York, San Francisco, you want to be there because you want to be close to, uh, amazing jobs in the amazing, uh, atmosphere. All of a sudden when the shelter in place economy took hold, proximity wasn’t a good thing anymore. That price premium essentially evaporated. And we saw rent declines in some of the, the most, you know, high, highly populated US cities, uh, on the order of 20 to 25% in places like New York and San Francisco and, and, and Boston. So, you know, I think that was the moment, Dave, when we had to kind of throw out the research agenda <laugh> that we had planned for 2020 and see, okay, how do we really focus in on what’s going on right now?
But what’s even more interesting is what happened next, because as, as many of your listeners I think are, are deeply aware of that kind of created this coiled spring in the housing market, so to speak, that just let out all this energy in starting in the second half of 2020. But really going into 2021, when we saw this massive boom in rents, our, our rent index showed rent grew 18% in 2021. Wow. Again, unheard of from a pre pandemic understanding of, of the US rental market. And then in the last couple years, we’ve really been tracking a, a cooling market ever since. Interest rates started to rise, economic uncertainty started to really take hold, and some of that feeling of invincibility that some parts of the economy felt in 2021 started to dissipate. So that’s still the market we’re in today. But, um, you know, as, as we’re talking, the Fed just announced, uh, 50 point, uh, 50 basis point cut. So, uh, it’s certainly still a dynamic market. We haven’t seen a quote unquote normal period of rent growth in the 2020s so far.

Dave:
Thanks for providing that context, Igor. I just wanted to call out that when you talk about cities like New York seeing double digit, 18%, 20% decreases how abnormal that is, even when you look back to periods of economic difficulty, like the great financial crisis, same double digit rent growth. Uh, correct me if I’m wrong, Igor basically doesn’t happen. So like we had a, a really significant shift in trend, um, and a severity of, of decline that hasn’t happened. Have the markets that saw those declines like New York, have they since rebounded?

Igor:
Yes. They, they have, um, some more, more strongly than others. New York City had the, the, the wildest set of swings because it, it was in the top two markets in terms of rent declines in 2020 and actually in the top two markets of rent growth in 2021. So I think if you were a New York renter a couple years ago, you were just massively confused and stressed. Um, uh, San Francisco has had a bit of a, of a slower recovery because so much demand got swept away in the remote work, uh, acceleration from kind of San Francisco as a, as a tech hub. But everyone really rode the rent rebound of 2021. But this past year has really seen a lot more geographic diversity in what’s happening with rent trends. The pandemic also brought with it kind of this u-turn away from what we were seeing in terms of urbanization and demand just flocking to downtown central business districts. I think renters voting with their feet are, are, are looking much more at kind of suburbs and places with more leg room on the margins as well. So there’s been a rebound, but nothing compared to the kind of boom that we’ve seen in places like Tampa, Florida, Phoenix, kind of early in the early in the pandemic,

Dave:
The from urban to more suburban demand. Mm-Hmm. <affirmative>, it kind of caught me off guard. I guess everything about the, the pandemic caught me off guard, but I, especially as an investor, sort of had this very almost stupidly simplistic view of where to buy real estate during this time was investing in Denver. I was like, the closer I could be to downtown, the safer the investment. Is the list less risky? It is. Mm-Hmm. <affirmative>, and I have to say, as an investor, it’s gotten harder to pick neighborhoods because suburbia is just more plentiful.

Igor:
Yes.

Dave:
And it’s not like, you know, it’s easier to like draw concentric circles around downtown and be like, this is gonna be good rent growth and a little bit further out will be still good, but a little bit weaker and then weaker and then weaker. And now it’s like trying to guess which of these suburbs is gonna see pop off, which ones are gonna suffer is super hard. I mean, this is a long shot, but do you have any, are there any trends to, like what types of suburbs tend to see the most growth?

Igor:
You know, in terms of the, the types of places too really about those kind of opportunities? I think that the focus really shifted from being about proximity to work, to being about proximity to amenities kind of broadly defined, right? I think there’s been a real untethering, which is just a really fundamental shift, a real significant untethering from where you choose to, to live and where you choose to work, right? So 30% of fully employed Americans, workdays are happening at home right now. That’s not just folks that are fully remote and, and work solely on Zoom, but a lot of people have at least some days that they’re working from home. You add it all up, that’s 30% of, of fully employed days. And even those that are going into an office, we’re seeing, uh, we’ve been tracking this long trend of an increase in super commuting.
People are just living further from, from work and they’re, they’re able to do that. Maybe they don’t have to go in as often, so they’re kind of untethering this decision. And I think question becomes much more about, okay, if I don’t have to be close to work, what do I want to be close to? Is it whatever the types of amenities that the big millennial generation loves to be near? Is it, is it schools? Is it, uh, urban amenities in suburban settings, uh, like, you know, the great breweries and restaurants? So I, I think that what I would look towards and the, the, of course there’s no crystal ball, there’s no hard and fast rule, but I think there’s been a shift away from just work proximity essentially to think of it as play proximity or, or proximity to the other things that you want to, uh, kind of power, power your life. So I think having a thesis around what that looks like and why a neighborhood has that kind of draw would be really compelling and I think necessary because you’re right, it has become a much more kinda multidimensional guessing game of where future renters will, will want to be.

Dave:
That’s a great synopsis. Thank you, Igor. I, I think it’s really important for our audience to hear what Igor just said about having a thesis because it, you can’t just really guess and this, that what works in one metro area suburb might not work in another one. For example, you know, I used to live and invest in Denver and, you know, proximity to trails or proximity to outdoor activities was really popular. I have a lot of friends I, I grew up in, in New York, and so what you were talking about those urban experiences in suburban environments, I know like all my friends who are moving outta the city, that’s what they prioritize. So you really have to, to understand your market and come up with your own idea of what’s gonna drive demand. And if you live in that market, hopefully that should be hard because it’s like, where do you wanna live? Where do your friends wanna live? Where are all your people moving?

Igor:
Right?

Dave:
And you can sort of create the foundation of your thesis based on just your own personal experiences.

Igor:
Mm-Hmm. <affirmative>. Yeah.

Dave:
All right. Time for a quick break and then we’ll be back with more bigger news with Igor Popov, thanks for sticking with us. Let’s jump back in with Igor. Igor, thank you for sort of helping us understand the last couple years. How would you describe 2024 thus far in terms of the rental market?

Igor:
Uh, 2024 has really been a, a shift back to a market where the renter has a little more control and a lot more, more options than certainly what we, what we saw a couple of years ago. Um, the big story, the big narrative is around a new wave of multifamily supply hitting the market this year and next. And I think that’s really, even though that’s kind of just in largely class a largely multifamily, uh, it’s still really kind of setting the tone for what’s happening all across the different segments of the rental market. And just to kind of give some context and put some numbers to it, we entered this year with a million units under construction throughout the US for multifamily units alone. You know, looking back 10 years ago, that number was more like 300,000, uh, entering 2014. Now we’ve got a million units in the pipeline entering this year with at least half of them hitting in 2024. And so I think that’s really been the primary storyline that’s kind of shaping how a lot of Americans are perceiving the rental market, both on the investor side and on on the render side.

Dave:
Thanks for providing that update. And I think the, the headline is really interesting ’cause it’s been very different, right? Obviously it’s different in every single market, but if you’re saying that the average rent price is up now, what did you say, uh, year over year right now?

Igor:
Well, so actually year over year we’re tracking negative, slightly negative rent growth. And again, that’s because all this new supply, uh, is, is hitting the market. We’ve been in negative year over year rent growth territory for, you know, a little bit over a year now. Uh, we saw in our rent index, the, the peak rents were in August of 2022. And, and we still haven’t kind of crawled back to that place, but those rent declines really concentrated in places like Texas, Florida, um, and some of the markets that are building the most, you look at the leaderboard for rent growth and it’s actually dominated by a lot of Midwest markets, right? <laugh>, I don’t know when the last time was that the Midwest was dominating the, the US rent growth leaderboards, but places like Cleveland and Louisville, grand Rapids, Milwaukee, uh, those aren’t kind of currently big new supply markets. Uh, and they’re actually still seeing some strong rent growth. So we’ve had times where a lot of the US moves together, but this is certainly a time where different, uh, different markets are seeing very different experiences. So I might be saying, Hey, it’s a little bit negative, but someone in Austin or Raleigh might be feeling that it’s actually quite negative and, and, and mm-hmm, <affirmative> pricing power has really declined. And, and some folks in Midwest northeast might actually be, be feeling a pretty strong rent growth market.

Dave:
Just two quick questions. One, when you say negative, how, how far are we off peak from August, 2022?

Igor:
Yeah, 2%. So just for context, we’re still 22% above where we were March, 2020, heading into the, the pandemic, but, but 2% off peak. So we essentially kinda reset to a new level. There’s almost no chance that we kind of revert to 2019 rents, but rent growth has evaporated. Mm-Hmm. <affirmative>. So it’s kind of been like a, you know, kind of think, think of a balloon that escapes the room and goes to a room with a higher ceiling and bounces around there for a while.

Dave:
And is this just multifamily or is this everything?

Igor:
So we track primarily multifamily single family is, you know, also not booming in terms of rents right now, but I think it’s seeing stronger rent growth is not feeling as direct pressure from this new construction. And the new construction boom is really concentrated in, in, in multifamily. So I think the closer you are to the new supply that’s hitting the market, uh, just in terms of, you know, how likely renters are to have you in their choice set along with a a, a new lease up, uh, that’s determining kind of how much of an, of an effect this new supply’s having on rents and, and how cool the market feels for for certain property.

Dave:
I’m glad you brought that up because it’s a question I’m always thinking about is in so many ways commercial real estate and residential real estate just act differently.

Igor:
Mm-Hmm. <affirmative>.

Dave:
But rent is one area where I feel like in the Venn diagram of CRE and residential, there’s like some overlap.

Igor:
Mm-Hmm. <affirmative>.

Dave:
And so does that multifamily supply glut impact single family home rents or duplex rents, for example?

Igor:
Yes, I think, I think it, it certainly does. It doesn’t affect it as much, you know, the close, again, the closer you are, the closer that substitution effect will be. But you know, a lot of renters go into their searches without a stubborn preference for multifamily single family. A lot of renters go into their searches saying, Hey, I don’t even know if I’ll find a place in my budget at all. What’s out there?

Dave:
Mm-Hmm. <affirmative>.

Igor:
And so a lot of renters are really choosing between, it always comes down to like the, the decision making process is gonna determine what’s ha what happens in the macro stats. So you have renters in Denver that are thinking, yeah, I’ll take a single family home or a, a multifamily unit, like, let’s see what they have to offer, let’s see what the rents are. And so that means they do end up competing on price even if they’re not the closest substitutes.

Dave:
I’m hoping Igor you can help me explain something that is very confusing. <laugh>
<laugh>. So
We’re talking about a multifamily supply collect, right? You, you explain the conditions well before that, during the pandemic there’s these positive factors for building multifamily housing. Mm-Hmm.

Igor:
<affirmative>.

Dave:
And now we’re saying rents are slowing because there’s too much multifamily housing at the same time every other day in the newspaper. You read about how there’s a housing shortage in the United States. Can you help me square those two seemingly contradictory data points? <laugh>?

Igor:
Yeah, absolutely. I mean, I think there’s a, there’s a timeframe component and then there’s a persona or demographic component. You know, sometimes the analogy I’ll give, this is a very California analogy. ’cause we were going through a drought, uh, a few while, a few months. You, you can have a period of heavy rain, it fills up the reservoirs a bit, but at the, you know, the, the storm passes and you’re still in a drought. Um, I think that’s really what a lot of these markets are, are, are feeling. And so what that means is on the margins, you’ll see rents fall, but they might not fall to the degree that maybe they would in a, in a more unconstrained market that had, um, uh, more building opportunity or less restriction on, on construction. You might see that, uh, with the households that are in the market today, they’re feeling a lot of options.
But, uh, there are a lot of households that aren’t being created because the affordable inventory isn’t there. As an example, one, one group I always sort of point to, because I think they’re so important in the housing market, we have a large population of young adults living at home, living with their parents, right? So 17% of 25 to 34 year olds live at home with their parents. We last saw that in 1940, right? Just for context. Uh, and so you have a lot of people sitting on the sidelines of the housing market because they essentially either can’t afford it or want to put their money, money elsewhere. And they don’t even make it into statistics about renters because they’re, they’re not renters yet. They’re, they’re, they’re living at home. They’re not participating in the market, but different market conditions can certainly draw them in. Uh, and that creates a big kinda opportunity for a more dynamic housing market as well. So I think it’s just a question about the scale that you’re looking at. The more you zoom out, the more the picture looks unders supplied.

Dave:
That is so helpful. And I love that analogy of a flood. Obviously no one wants a flood, but it’s kind of the situation, right? You know, during a flood you have way too much water. Mm-hmm. <affirmative>. But at the end of it, you still might not have enough water, which is essentially what you’re saying is happening. That’s a very good way to put it. Thank you. We have to take a break, but when we’re back, I’m gonna ask Igor when he expects new multifamily supply to drive up and what that means for rents in the near future.
We are back with apartment list chief economist, Igor Popov. One of the things that I really like as an analyst and an investor about multifamily and about rents is that when you’re talking about the supply problem is you never know what’s gonna happen in the economy, but you kind of know what’s happening with multifamily supply. Mm-Hmm. <affirmative> because people apply for permits and it takes years to build multifamily. And so it’s why even in 2022, a lot of analysts and economists were saying, Hey, rent growth is gonna slow down because we know this glut of supply is coming on now. Where at least where I’m sitting in 2024, I’m almost thinking the opposite’s gonna happen. You know, starting when in 2022 and rates went up, building conditions completely changed, and now the pipeline for new supply seems completely dry. To butcher our analogy even further, we’re going into a drought again in terms of new supply, first of all, is that how you see it as well?

Igor:
Yes. That’s, that’s how I see it. And I think the questions are around when it will come and how long it’ll last. Um, I think it’s a, it’s a when and not an if because you know, we’re, we’re living through a big supply wave right now, and there’s not another one coming on the heels of it. And we’re seeing that in multifamily permits coming down, completions outpacing permits by a very strong rate. There’s some disagreement about this, but I think my, my view is that 2025 will still feel a lot like 2024 in terms of ample supply coming online. When we get into 2026, it’s pretty clear that the units that might make that a supply rich year, they’re just not breaking ground at the same rate. Mm-hmm. <affirmative>, um, that, that, that would need. Now the interest rate dynamics are gonna determine how long that’s going to last or rate’s gonna come down enough to where there’s actually gonna be kind of a, a healthy pipeline coming in after that. But, um, that, that remains to be, to be seen.

Dave:
Yeah. It’s, it’s interesting to, to sort of think about because while you can see it coming, it’s hard to sort of balance all the many variables, obviously single family supply, demand, interest rates, the labor market, it’s, it’s confusing. So even though you see this, uh, dearth of construction happening, the implications aren’t super clear. But Igor, I’m curious, I’m gonna put you on the spot. Do you have a forecast or any thoughts on how rent growth will play out in the next few years?

Igor:
I think next year will still be very sluggish year for rent growth. Primarily. I think the, this really healthy supply pipeline, it’s not gonna be all released this year. So I think you’re still gonna see a lot of new lease ups hitting the market, especially in the Sunbelt, uh, places like Austin, Colorado Springs, uh, and the mountain west, uh, the Florida markets. Um, and you know, again, demand is harder to predict, but I think that, you know, with rates coming down, I think that’ll give some, some boost. So demand has been really healthy, but I, I don’t think it’ll be so dramatic that it will really overpower, uh, the sort of tug of war with, with, with supply. And then I think things will really start to pick back up from a rent growth perspective, maybe in the late 2025, but certainly in, in, in 2026 now. We’ll see what happens. I, you know, these past few years have been, uh, great for researchers, bad for forecasters

Dave:
<laugh>, yeah. One surprise after another.

Igor:
Yeah, exactly. One surprise after another. And it’s, you know, who’s the least wrong? But I do think that from what I’m seeing, the seesaw between supply and demand is still going to be, you know, relatively balanced, but still geared towards supply next year and certainly through the end of this year. Because I, I, I think that we’re the, the housing market is also so seasonal that I think once you, once you kind of miss the go around of summer moving season, it’s hard to generate a lot of heat. Um, and the market, I think coming into the cool months, folks that haven’t filled vacancies, property management companies that are looking to sort of get higher occupancy before the holidays are gonna be lowering rents. Um, and then the question is really gonna be around how strong can demand be to kind of counteract the supply that’s still being released from the pipeline come spring, summer moving season of 2025.

Dave:
Thank you for baking a bold prediction. I ask everyone on the show to make a prediction. Not everyone is willing to do it. <laugh>, when you say resuming rent growth in 2025, do you assume, well, like, you know, this elusive idea of a normal market, like could we maybe just see three to 5% rent growth, like you sort of we’re coming to expect in the, in the 20 tons at least?

Igor:
I think, I think so. I think we’re sort of oscillating a a around that. I think we’ll get back to that at some point. <laugh>, um, uh, we’re not gonna be just, uh, uh, seesaw between extreme rent growth or declines for a long time, but that’s where I need to be honest and say, I’ve made that prediction before and it’s taken longer than I think many of us thought to sort of get back to something that feels more like a, a clip at which rents are growing in line with other prices and output in the economy. Right. Which is really kind of what, what I think normal would look like.

Dave:
Awesome. Great. Well, Igor, thank you so much for joining us today. This has been a super, uh, helpful context and lesson on red growth in the economy. Is there anything else, uh, that you’ve been working on a department list, you or your team that you think our audience of real estate investors should know?

Igor:
Oh, well, I mean, we have a ton of, uh, you know, tools, data for download. Um, and, and so yeah, if you go to the apartment list research blog, just apartment list.com/research, I’ll put in a plug. Uh, lots of, uh, you can track our latest, latest reports and, and also data releases there. So

Dave:
Igor, this has been a huge help. Thanks again for joining us today.

Igor:
Thank you so much. I had a lot of fun. Thank you Dave.

Dave:
Of course. And thank you all so much for listening. I’m Dave Meyer for BiggerPockets and we’ll see you soon for another episode of the BiggerPockets podcast.